By: Lindsey Johnson

Homeownership has been on the rise over the past few years even during the COVID-19 pandemic, but a deeper look at who is able to become a homeowner reveals significant racial and economic gaps. With a growing recognition in Washington of this disparity and a renewed focus on increasing financial security for Black and Hispanic families, policymakers and industry have the opportunity to correct inequities and sustainably increase minority homeownership.

U.S. Census data for the third quarter of 2020 show that homeownership among White households stands at nearly 76 percent, compared to nearly 51 percent for Hispanic households, and 46 percent for Black households. Meanwhile, of the minority borrowers who qualified for home financing, many encountered added costs that make homeownership disproportionately more expensive or altogether out of reach.

COVID-19 has further compounded the racial and economic gap as millions of low- to moderate-income families have lost their jobs and face financial insecurity. The Urban Institute finds that Black and Hispanic homeowners are significantly more likely to face financial hardships and are more at risk of not being able to pay their rent or mortgage payment due to the impacts of the pandemic.

So, while we must focus on the pandemic and its impact on borrowers, and particularly minority borrowers, we must also not lose sight of addressing the longer-term systemic issues that unnecessarily increase costs or create barriers for minority borrowers. Importantly, expanding homeownership opportunities for minority borrowers does not have to be at the expense of the reforms made over the last decade that have drastically improved lending to protect consumers and avoid another housing market collapse. The housing finance system can remain stable and manage mortgage credit risk prudently, while also using data-driven, targeted approaches to reduce barriers to affordable mortgages for Black and Hispanic households.

Mortgage affordability could be further stressed once new regulatory mandates are implemented. This includes new capital requirements for Fannie Mae and Freddie Mac (the GSEs) recently finalized by the Federal Housing Finance Agency (FHFA). While it is essential that the GSEs hold appropriate capital, the rule must be balanced and policymakers should consider changes to elements of the final rule that threaten to raise the cost of mortgages for all borrowers and push homeownership farther out of reach for many families of color.

Additionally, policies that adversely drive up costs for minority borrowers should be re-examined and reduced or eliminated. Loan-level price adjustments (LLPAs) that were introduced by the GSEs in 2008 are especially burdensome for minority and first-time homebuyers. These fees are disproportionately paid by borrowers with lower down payments and credit scores, whose mortgages are already protected by private mortgage insurance. Essentially, borrowers are being double charged for the same risk protection. Industry and consumer advocates — including the National Fair Housing Alliance and the Center for Responsible Lending — have long urged the GSEs to reduce or eliminate these redundant fees.

Further, it is critical that policymakers recognize the role of low down payment mortgage options in facilitating homeownership. In fact, more than 80 percent of first-time homebuyers used low down payment mortgage options in the past several years — with options as low as 3 percent down. While these options have prudently enabled millions of people of all backgrounds to become homeowners, even more targeted down payment assistance programs should be considered for borrowers who may not have intergenerational wealth or equity from a previous home to contribute to a down payment. Legislation like Rep. Al Lawson’s (D-Fla.) First-Time Homeowners Assistance Act should be given close consideration when re-introduced in 2021. Meanwhile, President Biden has already expressed interest in a first-time homebuyer tax credit — a very welcome early signal from the new administration.

There are other issues that warrant attention, such as the low supply of affordable housing and lack of access to financial education. This list goes on, and we recommend that the Biden administration assemble a task force that includes broad representation from industry, consumer advocate community, and government to formulate an action plan, build consensus, and get to work.

As an industry that exists to help low- and middle-income households qualify for low down payment mortgages, private mortgage insurers understand the need to balance responsible lending with access to affordable mortgage finance credit. There are tangible and measurable steps to sustainably expand homeownership for minority families and fortunately there is an eagerness across the housing policy sector to achieve these outcomes.

This piece was first published in The Hill on January 30, 2021.

By: Lindsey Johnson

Today, the place you call home matters more than ever. Unfortunately, many Americans continue to believe homeownership is out of reach because they think a 20 percent down payment is needed to qualify for a mortgage.

A recent report by the private mortgage insurance (MI) industry finds that it could take a family earning the national median income over 20 years to save for a 20 percent down payment. But the wait decreases by 67 percent when a five percent down payment is the goal. Fortunately, millions of homebuyers each year qualify for home financing with low down payments.

Given the current economic environment due to COVID-19 and the desire of many people to keep more cash on-hand, low down payment loans are more important than ever. Low down payment mortgages with private mortgage insurance have proven to be a time-tested means for Americans to access affordable homeownership sooner while still providing credit risk protection and stability to the U.S. housing system. It is no wonder why more than 33 million homeowners have used this type of home financing and why its use is on the rise.

The report finds that in 2019, the number of low down payment loans backed by private MI increased 22.9 percent. Over 1.3 million home loans were purchased or refinanced with private MI, up from just over 1 million in 2018. Nearly 60 percent of the borrowers of these loans were first-time homebuyers and 40 percent had annual incomes of less than $75,000.

Why have millions turned to this type home financing?

Let us first take a closer look at a borrower who earns the national median income of $63,179. To save 20 percent, plus closing costs, for a $274,600 home, the median sales price for a single-family home last year, they would need to bring more than $63,000 in cash to the table. It could take up to 21 years to save up this amount based on the national savings rate dedicated towards a mortgage. But if this borrower qualifies using private MI on a five percent down payment mortgage, their wait time drops to just seven years. This type of home financing offers Americans a chance to secure home financing much sooner than previously believed.

Why is 20% the “magic number”?

Data demonstrates that borrowers who make larger down payments are less likely to default on their mortgages than borrowers with lower down payments. Therefore, lenders traditionally require a 20 percent down payment to offer mortgage financing to a borrower. This is where mortgage insurance steps in, providing credit enhancement for the borrower with a lower down payment, and insuring the loan for the lender in the event the borrower stops making their payments. Once the borrower builds 20 percent equity in their mortgage, the insurance can be cancelled, thus lowering the monthly payment. Private MI also helps Americans buy a home without necessarily breaking the bank.

Private mortgage insurance is offered on so-called conventional loans that are backed by the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. When there is private MI on a loan, the risk protection provided to lenders for making a low down payment mortgage possible is extended to the GSEs too. In the event of a default, the private mortgage insurance stands to cover losses first, meaning private MI also protects taxpayers.

Supporting the American Dream

As the report demonstrates, private mortgage insurers’ role in the low down payment market significantly increased over the last five years. Between 2015 and 2019, private mortgage insurers’ market share in the low down payment lending sector increased from 34.8 percent of the insured market in 2015 to 44.7 percent in 2019, helping millions of Americans qualify for home financing.

Private MI offers a reliable path to the American dream of owning a home. Since 1957, private MI has helped more than 33 million Americans become homeowners while protecting taxpayers. And right now, more than ever, we are even more aware of the benefits of owning a home—from building wealth to creating stability to the importance of having a safe place to call your own.

Lindsey Johnson is the president of the U.S. Mortgage Insurers (USMI), the association representing the nation’s leading private mortgage insurance companies.

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Mortgage Professional America originally published USMI President Lindsey Johnson’s opinion piece, “Low down payments backed by mortgage insurance more important than ever” on August 10, 2020.